A) A sandwich.
B) National defense.
C) A private toll road.
D) A concert ticket.
National defense is an example of a public good because it is non-excludable (people cannot be excluded from benefiting from it) and non-rivalrous (one person’s consumption does not reduce the availability for others).
A) An increase in the price of a substitute good.
B) A decrease in consumer income, assuming the good is a normal good.
C) A decrease in the price of a complementary good.
D) A decrease in the price of the good.
When the price of a complementary good (e.g., printers for computers) decreases, the demand for the original good (e.g., computers) increases. This is because consumers are more likely to purchase both goods together.
A) The change in the price of a good that alters the quantity supplied.
B) The change in quantity demanded resulting from a change in the price of a good, holding real income constant.
C) The change in the price of a good that alters the consumer’s real income and, thus, the quantity demanded.
D) The responsiveness of quantity demanded to a change in the price of a substitute good.
The income effect refers to the change in a consumer’s purchasing power when the price of a good changes. If a good’s price decreases, the consumer can afford to buy more, effectively increasing real income and demand for the good.
A) A positive income effect that dominates the substitution effect.
B) A negative income effect that dominates the substitution effect.
C) A horizontal demand curve.
D) A demand curve that is upward sloping.
A Giffen good is a type of inferior good for which an increase in price leads to an increase in quantity demanded, due to the dominant positive income effect outweighing the substitution effect.
A) The firm should always shut down.
B) The firm will always continue to produce at a loss.
C) The firm will produce if the price covers average variable cost.
D) The firm will produce if the price is below average variable cost.
In the short run, a firm experiencing losses will continue to produce if the price covers its average variable cost, as this helps minimize losses. If the price is below AVC, the firm should shut down.
A) Homogeneous products.
B) Many buyers and sellers.
C) Barriers to entry exist.
D) Firms are price takers.
In perfect competition, there are no barriers to entry or exit. This characteristic distinguishes it from monopolistic competition or oligopoly, where barriers can limit competition.
A) Free access to information.
B) Homogeneous products.
C) High startup costs.
D) Perfect knowledge of prices.
Barriers to entry in an oligopoly often include high startup costs, which make it difficult for new firms to enter the market and compete with existing firms.
A) It is the same as the marginal cost curve above the average variable cost.
B) It is vertical at the equilibrium price.
C) It is perfectly elastic at the market price.
D) It is downward sloping.
In perfect competition, a firm’s short-run supply curve is its marginal cost curve above the average variable cost because the firm will only produce if it can cover its variable costs.
A) A surplus of the good will occur.
B) A shortage of the good will occur.
C) The market will reach the equilibrium price.
D) There will be no effect on the market.
A price ceiling set below the equilibrium price makes the good cheaper, leading to increased demand but reduced supply, creating a shortage.
A) Increase.
B) Decrease.
C) Remain unchanged.
D) Become perfectly elastic.
When the price of a complement good (e.g., printers for computers) increases, the demand for the original good (e.g., computers) typically decreases because consumers are less likely to buy the complementary products together.
A) Increases as output increases.
B) Is constant as output increases.
C) Decreases as output increases.
D) Remains unchanged with respect to output.
A natural monopoly occurs when a firm can produce the entire market supply at a lower cost than multiple firms. As output increases, the firm benefits from economies of scale, which causes average total cost to decrease.
A) A market with many buyers and one seller.
B) A market with one buyer and many sellers.
C) A market with one seller and one buyer.
D) A market with many buyers and many sellers.
A monopsony is a market structure where there is only one buyer and many sellers. The buyer has significant control over the price and quantity of goods or services purchased.
A) Marginal cost equals average total cost.
B) Marginal revenue equals marginal cost.
C) Price equals marginal revenue.
D) Price equals average total cost.
For a monopolist, profit is maximized when marginal revenue (MR) equals marginal cost (MC). This condition determines the output level that maximizes profit.
A) Total product will always increase as more units of a variable input are added.
B) Marginal product increases as more units of a variable input are added.
C) The marginal product of labor decreases after a certain point as more units of labor are added.
D) Average fixed cost decreases as output increases.
The law of diminishing returns states that as more units of a variable input (e.g., labor) are added to a fixed amount of other inputs, the additional output produced (marginal product) will eventually decrease.
A) The responsiveness of quantity demanded to a change in income.
B) The responsiveness of quantity demanded to a change in price.
C) The relationship between price and quantity supplied.
D) The degree of consumer preference for a good.
Price elasticity of demand measures how much the quantity demanded of a good changes in response to a change in its price. A high elasticity means demand is highly responsive to price changes.